1. At the election of the filing constituent entity, a constituent entity-owner of an investment entity may apply a taxable distribution method with respect to its ownership interest in the investment entity, provided that the constituent entity- owner is not an investment entity and can be reasonably expected to be subject to tax on distributions from the investment entity at a tax rate that equals or exceeds the minimum tax rate. 2. Under the taxable distribution method, distributions and deemed distributions of the qualifying income of an investment entity shall be included in the qualifying income of the constituent entity-owner that received the distribution, provided that it is not an investment entity. The amount of covered taxes incurred by the investment entity that is creditable against the tax liability of the constituent entity-owner arising from the distribution of the investment entity shall be included in the qualifying income and adjusted covered taxes of the constituent entity-owner that received the distribution. The share of the constituent entity-owner in the undistributed net qualifying income of the investment entity referred to in paragraph 3 arising in the third year preceding the fiscal year (the ‘tested year’) shall be treated as qualifying income of that investment entity for the fiscal year. The amount equal to such qualifying income multiplied by the minimum tax rate shall be treated as top-up tax of a low-taxed constituent entity for the fiscal year for the purposes of Chapter II. The qualifying income or loss of an investment entity and the adjusted covered taxes attributable to such income for the fiscal year shall be excluded from the computation of the effective tax rate in accordance with Chapter V and with Article 41(1) to (4), except for the amount of covered taxes referred to in the second subparagraph of this paragraph. 3. The undistributed net qualifying income of an investment entity for the tested year shall be the amount of qualifying income of that investment entity for the tested year reduced, up to zero, by: (a) the covered taxes of the investment entity; (b) distributions and deemed distributions to shareholders that are not investment entities during the period starting with the first day of the third year preceding the fiscal year and ending with the last day of the reporting fiscal year in which the ownership interest was held (the ‘testing period’); (c) qualifying losses arising during the testing period; and (d) any residual amount of qualifying losses that has not already reduced the undistributed net qualifying income of that investment entity for a previous tested year, namely the investment loss carry-forward. The undistributed net qualifying income of an investment entity shall not be reduced by distributions or deemed distributions that already reduced the undistributed net qualifying income of that investment entity for a previous tested year in application of the first subparagraph, point (b). The undistributed net qualifying income of an investment entity shall not be reduced by the amount of qualifying losses that already reduced the undistributed net qualifying income of that investment entity for a previous tested year in application of the first subparagraph, point (c). 4. For the purposes of this Article, a deemed distribution shall arise when a direct or indirect ownership interest in the investment entity is transferred to an entity that does not belong to the MNE group or large-scale domestic group and is equal to the share of the undistributed net qualifying income attributable to such ownership interest on the date of such transfer, determined without regard to the deemed distribution. 5. The election under paragraph 1 of this Article shall be made in accordance with Article 45(1). If the election is revoked, the share of the constituent entity-owner in the undistributed net qualifying income of the investment entity for the tested year at the end of the fiscal year preceding the fiscal year the revocation is made shall be treated as qualifying income of the investment entity for the fiscal year. The amount equal to such qualifying income multiplied by the minimum tax rate shall be treated as top-up tax of a low-taxed constituent entity for the fiscal year for the purposes of Chapter II ...

1. For the purposes of this Article, an ‘insurance investment entity’ means an entity that would meet the definition of an investment fund set out in Article 3, point (31), or a real estate investment vehicle set out in Article 3, point (32), if it had not been established in relation to liabilities under an insurance or annuity contract and if it were not wholly owned by an entity that is subject to regulation in the jurisdiction where it is located as an insurance company. 2. At the election of the filing constituent entity, a constituent entity that is an investment entity or an insurance investment entity may be treated as a tax transparent entity if the constituent entity-owner is subject to tax in the jurisdiction in which it is located under a fair market value or a similar regime based on the annual changes in the fair value of its ownership interests in such entity and the tax rate applicable to the constituent entity-owner on such income equals or exceeds the minimum tax rate. 3. A constituent entity that indirectly owns an ownership interest in an investment entity or in an insurance investment entity through a direct ownership interest in another investment entity or an insurance investment entity shall be considered to be subject to tax under a fair market value or similar regime with respect to its indirect ownership interest in the first-mentioned entity or insurance investment entity if it is subject to a fair market value or similar regime with respect to its direct ownership interest in the second-mentioned entity or insurance investment entity. 4. The election under paragraph 2 of this Article shall be made in accordance with Article 45(1). If the election is revoked, any gain or loss from the disposal of an asset or a liability held by the investment entity or an insurance investment entity shall be determined on the basis of the fair market value of the asset or liability on the first day of the year the revocation is made ...

1. Where a constituent entity of an MNE group or of a large-scale domestic group is an investment entity that is not a tax transparent entity and that has not made an election in accordance with Articles 42 and 43, the effective tax rate of such investment entity shall be computed separately from the effective tax rate of the jurisdiction in which it is located. 2. The effective tax rate of the investment entity as referred to in paragraph 1 shall be equal to its adjusted covered taxes divided by an amount equal to the allocable share of the MNE group or large-scale domestic group in the qualifying income or loss of that investment entity. Where more than one investment entity is located in a jurisdiction, their effective tax rate shall be computed by combining their adjusted covered taxes as well as the allocable share of the MNE group or large-scale domestic group in their qualifying income or loss. 3. The adjusted covered taxes of an investment entity as referred to in paragraph 1 shall be the adjusted covered taxes that are attributable to the allocable share of the MNE group or large-scale domestic group in the qualifying income of the investment entity and the covered taxes allocated to the investment entity in accordance with Article 24. The investment entity’s adjusted covered taxes shall not include any covered taxes accrued by the investment entity attributable to income that is not part of the MNE group or large-scale domestic group’s allocable share of the investment entity’s income. 4. The top-up tax of an investment entity as referred to in paragraph 1 shall be an amount equal to the top-up tax percentage of the investment entity multiplied by an amount equal to the difference between the allocable share of the MNE group or large-scale domestic group in the qualifying income of the investment entity and the substance-based income exclusion computed for the investment entity. The top-up tax percentage of an investment entity shall be a positive amount equal to the difference between the minimum tax rate and the effective tax rate of such investment entity. Where more than one investment entity is located in a jurisdiction, their effective tax rate shall be computed by combining their substance-based income exclusion amounts as well as the allocable share of the MNE group or large-scale domestic group in their qualifying income or loss. The substance-based income exclusion of an investment entity shall be determined in accordance with Article 28(1) to (7). The eligible payroll costs of eligible employees and eligible tangible assets taken into account for such investment entity shall be reduced in proportion to the allocable share of the MNE group or large-scale domestic group in the qualifying income of the investment entity divided by the total qualifying income of such investment entity. 5. For the purposes of this Article, the allocable share of the MNE group or large-scale domestic group in the qualifying income or loss of an investment entity shall be determined in accordance with Article 9, taking into account only interests that are not subject to an election in accordance with Article 42 or 43 ...

1. A filing constituent entity may make an election for itself or with respect to another constituent entity that is subject to an eligible distribution tax system to include the amount determined as a deemed distribution tax in accordance with paragraph 2 in the adjusted covered taxes of the constituent entity for the fiscal year. The election shall be made annually in accordance with Article 45(2) and shall apply to all the constituent entities that are located in a jurisdiction. 2. The amount of deemed distribution tax shall be the lesser of: (a) the amount of adjusted covered taxes necessary to increase the effective tax rate as computed in accordance with Article 27(2) for the jurisdiction for the fiscal year to the minimum tax rate; or (b) the amount of tax that would have been due if the constituent entities located in the jurisdiction had distributed all of their income that is subject to the eligible distribution tax system during such fiscal year. 3. Where an election is made under paragraph 1, a deemed distribution tax recapture account shall be established for each fiscal year in which such election applies. The amount of deemed distribution tax determined in accordance with paragraph 2 for the jurisdiction shall be added to the deemed distribution tax recapture account for the fiscal year in which it was established. At the end of each subsequent fiscal year, the outstanding balances in the deemed distribution tax recapture accounts established for prior fiscal years shall be reduced in chronological order, up to zero, by the taxes paid by the constituent entities during the fiscal year in relation to actual or deemed distributions. Any residual amount in the deemed distribution tax recapture accounts remaining after the application of the second subparagraph shall be reduced, up to zero, by an amount equal to the net qualifying loss of a jurisdiction multiplied by the minimum tax rate. 4. Any residual amount of net qualifying loss multiplied by the minimum tax rate remaining after the application of paragraph 3, third subparagraph, for the jurisdiction, shall be carried forward to the following fiscal years and shall reduce any residual amount in the deemed distribution tax recapture accounts remaining after the application of paragraph 3. 5. The outstanding balance, if any, of the deemed distribution tax recapture account on the last day of the fourth fiscal year after the fiscal year for which such account was established shall be treated as a reduction to the adjusted covered taxes previously determined for such fiscal year. The effective tax rate and top-up tax for such fiscal year shall be recomputed accordingly, in accordance with Article 29(1). 6. Taxes that are paid during the fiscal year in relation to actual or deemed distributions shall not be included in adjusted covered taxes to the extent they reduce a deemed distribution tax recapture account in accordance with paragraphs 3 and 4. 7. Where a constituent entity that is subject to an election under paragraph 1 leaves the MNE group or large-scale domestic group or substantially all of its assets are transferred to a person that is not a constituent entity of the same MNE group or large-scale domestic group located in the same jurisdiction, any outstanding balance of the deemed distribution tax recapture accounts in previous fiscal years in which such account was established shall be treated as a reduction to the adjusted covered taxes for each of those fiscal years in accordance with Article 29(1). Any additional top-up tax amount due shall be multiplied by the following ratio to determine the additional top-up tax due for the jurisdiction: where: (a) the qualifying income of the constituent entity is determined in accordance with Chapter III for each fiscal year in which there is an outstanding balance of the deemed distribution tax recapture accounts for the jurisdiction; and (b) the net qualifying income of the jurisdiction is determined in accordance with Article 26(2) for each fiscal year in which there is an outstanding balance of the deemed distribution tax recapture accounts for the jurisdiction ...

1. For the purposes of this Article, the following definitions apply: (a) ‘deductible dividend regime’ means a tax regime that applies a single level of taxation on the income of the owners of an entity by deducting or excluding from the income of the entity the profits distributed to the owners or by exempting a cooperative from taxation; (b) ‘deductible dividend’ means, with respect to a constituent entity that is subject to a deductible dividend regime: (i) a distribution of profits to the holder of an ownership interest in the constituent entity that is deductible from the taxable income of the constituent entity under the laws of the jurisdiction in which it is located; or (ii) a patronage dividend to a member of a cooperative; and (c) ‘cooperative’ means an entity that collectively markets or acquires goods or services on behalf of its members and that is subject to a tax regime in the jurisdiction where it is located that ensures the tax neutrality in respect of goods or services that are sold or acquired by its members through the cooperative. 2. An ultimate parent entity of an MNE group or of a large-scale domestic group that is subject to a deductible dividend regime shall reduce, up to zero, for the fiscal year, its qualifying income by the amount that is distributed as deductible dividend within 12 months after the end of the fiscal year, provided that: (a) the dividend is subject to tax in the hands of the recipient for a taxable period that ends within 12 months after the end of the fiscal year at a nominal rate that equals or exceeds the minimum tax rate; or (b) it can be reasonably expected that the aggregate amount of adjusted covered taxes and taxes of the ultimate parent entity paid by the recipient on such dividend equals or exceeds that income multiplied by the minimum tax rate. 3. An ultimate parent entity of an MNE group or of a large-scale domestic group that is subject to a deductible dividend regime shall also reduce, up to zero, for the fiscal year, its qualifying income by the amount that it distributes as deductible dividend within 12 months after the end of the fiscal year, provided that the recipient is: (a) a natural person, and the dividend received is a patronage dividend from a supply cooperative; (b) a natural person that is tax resident in the same jurisdiction where the ultimate parent entity is located and that holds ownership interests representing a right to 5 % or less of the profits and assets of the ultimate parent entity; or (c) a governmental entity, an international organisation, a non-profit organisation or a pension fund other than a pension services entity, that is tax resident in the jurisdiction where the ultimate parent entity is located. 4. The covered taxes of an ultimate parent entity, other than the taxes for which the dividend deduction was allowed, shall be reduced proportionally to the amount of qualifying income reduced in accordance with paragraphs 2 and 3. 5. Where the ultimate parent entity holds an ownership interest in another constituent entity that is subject to a deductible dividend regime, directly or through a chain of such constituent entities, paragraphs 2, 3 and 4 shall apply to any other constituent entity located in the jurisdiction of the ultimate parent entity that is subject to the deductible dividend regime, to the extent that its qualifying income is further distributed by the ultimate parent entity to recipients that meet the requirements set out in paragraphs 2 and 3. 6. For the purposes of paragraph 2, a patronage dividend distributed by a supply cooperative shall be treated as subject to tax in the hands of the recipient insofar as such dividend reduces a deductible expense or cost in the computation of the recipient’s taxable income or loss ...

1. The qualifying income of a flow-through entity that is an ultimate parent entity shall be reduced, for the fiscal year, by the amount of qualifying income that is attributable to the holder of an ownership interest (the ‘ownership holder’) in the flow-through entity, provided that: (a) the ownership holder is subject to tax on such income for a taxable period that ends within 12 months after the end of that fiscal year at a nominal rate that equals or exceeds the minimum tax rate; or (b) it can be reasonably expected that the aggregated amount of adjusted covered taxes of the ultimate parent entity and taxes paid by the ownership holder on such income within 12 months after the end of the fiscal year equals or exceeds an amount equal to that income multiplied by the minimum tax rate. 2. The qualifying income of a flow-through entity that is an ultimate parent entity shall also be reduced, for the fiscal year, by the amount of qualifying income that is allocated to the ownership holder in the flow-through entity provided that the ownership holder is: (a) a natural person that is tax resident in the jurisdiction where the ultimate parent entity is located and that holds ownership interests representing a right to 5 % or less of the profits and assets of the ultimate parent entity; or (b) a governmental entity, an international organisation, a non-profit organisation or a pension fund that is tax resident in the jurisdiction where the ultimate parent entity is located and that holds ownership interests representing a right to 5 % or less of the profits and assets of the ultimate parent entity. 3. The qualifying loss of a flow-through entity that is an ultimate parent entity shall be reduced, for the fiscal year, by the amount of qualifying loss that is attributable to the ownership holder in the flow-through entity. The first subparagraph shall not apply to the extent the ownership holder is not allowed to use such loss for the computation of its taxable income. 4. The covered taxes of a flow-through entity that is an ultimate parent entity shall be reduced proportionally to the amount of qualifying income reduced in accordance with paragraphs 1 and 2. 5. Paragraphs 1 to 4 shall apply to a permanent establishment through which a flow-through entity that is an ultimate parent entity wholly or partly carries out its business or through which the business of a tax transparent entity is wholly or partly carried out, provided that the ultimate parent entity’s ownership interest in that tax transparent entity is held directly or through a chain of tax transparent entities ...

Example 7.3.4 – 1 Eligible Distribution Tax Regime 1. A Co is a Constituent Entity of an MNE Group and it is located in a jurisdiction with an Eligible Distribution Tax Regime. Distributions (and deemed distributions) are subject to tax at a 15% rate. An election pursuant to Article 7.3.1 is made for Year 1, Year 2, and Year 3 with respect to the jurisdiction. A Co makes no actual or deemed distributions in Year 1, Year 2, or Year 3. 2. In Year 1, A Co earns GloBE Income of EUR 100 and records Deemed Distribution Tax of EUR 15 pursuant to Article 7.3.2(a). Accordingly, the balance of the Deemed Distribution Tax Recapture Account at the end of Year 1 is EUR 15 (see Article 7.3.4). 3. In Year 2, A Co incurs a Net GloBE Loss of EUR 120. Under Article 7.3.3, the Net GloBE Loss is multiplied by the Minimum Rate (i.e., EUR 120 x 15% = EUR 18) and EUR 15 is applied to reduce the Deemed Distribution Tax Recapture Account to EUR 0 (Article 7.3.3(b)). The excess over the Deemed Distribution Tax Recapture Account, EUR 3 (= EUR 18 – EUR 15), is added to a Recapture Account Loss Carry-forward. 4. In Year 3, A Co earns GloBE Income of EUR 100 and Deemed Distribution Tax of EUR 15 is recorded to achieve the Minimum Rate (see Article 7.3.2(a)). The Deemed Distribution Tax Recapture Account is increased by EUR 15 and then reduced by EUR 3, the balance of the Recapture Account Loss Carry-forward from Year 2, leaving a balance of EUR 12 in the Deemed Distribution Tax Recapture Account established for Year 3. Year 1 Year 2 Year 3 GloBE Income (or Loss) EUR 100 (EUR 120) EUR 100 Tax at Minimum Rate EUR 15 (EUR 18) EUR 15 Deemed Distribution Tax Recapture Account EUR 15 EUR 0 EUR 12 Recapture Account Loss Carry-forward EUR 0 EUR 3 EUR 0 ...

Example 7.1.4 – 1 UPE that is a Flow-through Entity 1. A Co is the UPE of ABC Group. A Co is a Flow-through Entity and a Tax Transparent Entity created in Country A with two owners, each of whom holds 50% of its Ownership Interests. A Co conducts business operations in Countries A and B. The place of business through which A Co carries out business operations in Country B creates a PE in Country B. Overall, A Co generated GloBE Income of EUR 300 in Countries A and B during a Fiscal Year. 2. Under the rules of Articles 3.4 and 3.5, EUR 100 of A Co’s income is allocated to a PE located in Country B (see Article 3.5.1 (a)). Country B imposes tax on the owners of A Co in respect of the EUR 100 income allocated to PE at a 15% nominal rate and each owner paid EUR 7.5 of tax to Country B (total EUR 15). 3. In Country B, the holders of A Co’s Ownership Interests are subject to tax at a nominal rate that equals the Minimum Rate and it is reasonable to expect that the EUR 7.5 tax paid by each holder equals the amount of each holders’ share of the PE’s income multiplied by the Minimum Rate, or EUR 7.5 (= 50 income x 15% Minimum Rate). Accordingly, PE’s GloBE Income is reduced by EUR 100 in Country B pursuant to Article 7.1.4. 4. A table illustrating the numerical results of this example is set out below. A Co Country B Allocation income EUR 100 Tax rate 15% Tax paid EUR 15 Tax above/(below) Minimum Rate EUR 0 Tax reduction Article 7.1.4 Yes ...

Example 7.1.1(a) – 1 Ultimate Parent Entity that is a Flow-through Entity 1. A Co is a Flow-through Entity that is the UPE of an MNE Group. A Co is located in Country A and has a Fiscal Year that ends on 31 January. Person 1 is an individual tax resident in Country A while Person 2 is an individual tax resident in Country B. Person 1 and Person 2 each hold a 50% of the Ownership Interests in A Co. For the Fiscal Year ended 31 January Year 1, A Co reports EUR 140,000 of income both for domestic income tax and GloBE purposes. 2. Under the tax laws of Country A, EUR 70,000 of A Co’s income is included in the taxable income of Person 1 for the calendar year ended 31 December Year 1. The computation of the taxable income of Person 1 also includes a loss of EUR 50,000 from another business conducted in Country A. The taxable income of Person 1 under the tax laws of Country A is EUR 20,000 (= 70,000 – 50,000) and Person 1 is subject to tax in Country A at a rate of 20% on such taxable income. 3. Under the tax laws of Country A, Person 2 is treated as having a PE in Country A and the taxable income of that PE includes EUR 70,000 of A Co’s taxable income. Person 2 is subject to tax in Country A at a rate of 20% on the income of its PE for the calendar year ended 31 December Year 1. 4. A Flow-Through Entity that is the UPE reduces its GloBE Income pursuant to Article 7.1.1(a)(i) by the amount of GloBE Income attributable to an Ownership Interest if (1) the holder is subject to tax on that income for a taxable period that ends within 12 months of the end of the MNE Group’s Fiscal Year and (2) the holder of the Ownership Interest is subject to tax on the full amount of such income at a nominal rate that equals or exceeds the Minimum Rate. 5. Person 1 is subject to tax on his/her share of A Co’s GloBE Income for a taxable period that ends on 31 December Year 1, which is within 12 months of the end of A Co’s Fiscal Year ended on 31 January Year 1, notwithstanding that payment of Person 1’s tax liability is not due within 12 months of the end of A Co’s Fiscal Year. Further, Person 1 is subject to tax on his/her share of A Co’s GloBE Income at a nominal rate that equals or exceeds the Minimum Rate. Person 1 is subject to tax on the full amount of such income notwithstanding that he/she was allowed to offset his/her share of A Co’s GloBE Income with a loss from another business in computing his/her Country A taxable income. Accordingly, A Co reduces its GloBE Income for the Fiscal Year ended 31 January Year 1 pursuant to Article 7.1.1(a)(i) by EUR 70,000 in respect of the Ownership Interests held by Person 1. A Co will reduce its Covered Taxes proportionately under Article 7.1.3. 6. Person 2 is subject to tax on his/her share of A Co’s GloBE Income for a taxable period that ends within 12 months of the end of A Co’s Fiscal Year. Person 2 is also subject to tax on the full amount of such income at a nominal rate that equals or exceeds the Minimum Rate. Accordingly, A Co reduces its GloBE Income for the Fiscal Year ended 31 January Year 1 pursuant to Article 7.1.1(a)(i) by EUR 70,000 in respect of the Ownership Interests held by Person 2. A table illustrating the results of this example is set out below. Person 1 Person 2 GloBE Income 70,000 70,000 Tax at Minimum Rate 15% 15% Nominal Rate 20% 20% GloBE Income reduction Article 7.1.1 (a)(i) Yes Yes Example 7.1.1(a) – 2 UPE that is a Flow-through Entity 1. C Co is a Flow-through Entity and a Tax Transparent Entity that is the UPE of an MNE Group. C Co is located in Country C where a 5% CIT rate applies. C Co’s taxable income and GloBE Income for the Fiscal Year ended on 31 December Year 1 is EUR 200,000. The Adjusted Covered Taxes of C Co on its income are EUR 10,000 (= 5%* EUR 200,000) and such taxes meet the definition of Covered Taxes (see Article 4.2). 2. Person 3 is an individual tax resident in Country C that holds a 50% Ownership Interest in C Co. Person 3’s share of C Co’s income for Year 1 is EUR 95,000 (= 50% * [EUR 200,000 – 10,000]). Person 3 is subject to a nominal 11% personal income tax rate on a calendar year basis. Person 3’s share of C Co’s income for the Fiscal Year ended on 31 December Year 1 is included in Person 3’s Country C taxable income for the calendar year that ended 31 December Year 1. Person 3 is not entitled to reduce its Country C tax imposed on its share of C Co’s income as a result of Country C taxes imposed on such income. 3. C Co cannot reduce its GloBE Income pursuant to subparagraph (i) of Article 7.1.1(a) because the personal income tax rate applicable to Person 3 is 11%, which is a nominal rate below the Minimum Rate. However, a Flow-Through Entity that is the UPE reduces its GloBE Income pursuant to subparagraph (ii) of Article 7.1.1(a) by the amount of GloBE Income attributable to an Ownership Interest if (1) the holder is subject to tax on that income for a taxable period that ends within 12 months of the end of the MNE Group’s Fiscal Year and (2) it can reasonably be expected that the aggregate amount of Adjusted Covered Taxes of the UPE and Taxes of the holder of the Ownership Interest on such income equals or exceeds the amount that results from ...

99. Article 7.6 provides another alternative to the rule in Article 7.4. This alternative is the Taxable Distribution Method. This method reduces the exposure to Top-up Tax to the extent that the Investment Entity makes distributions of its income within a four-year period that are taxable in the hands of the recipients at or above the Minimum Rate. Article 7.6.1 100. Article 7.6.1 provides for a Five-Year election to use the Taxable Distribution Method. The election is made by the Filing Constituent Entity and is only available in the case of the Constituent Entity-owners that are subject to tax in their location on distributions from the Investment Entity and only if the Constituent Entity-owner can be reasonably expected to be subject to tax on such distributions at a rate that equals or exceeds the Minimum Rate. The election need not be made with respect to all Constituent Entity-owners of the Investment Entity. However, the election applies to all of the Constituent Entity-owner’s Ownership Interests in the Investment Entity. Article 7.6.2 101. Article 7.6.2 sets out the operation of the Taxable Distribution Method. 102. Paragraph (a) requires the Constituent Entity-owner to include actual and deemed distributions in the computation of its GloBE Income in the Fiscal Year for which it is subject to tax on the distribution. The GloBE Rules do not have an independent definition of deemed distribution, although Article 7.6.5(c) treats certain transfers of an Ownership Interest as a deemed distribution. The reference to deemed distribution in paragraph (a) is intended to ensure that the Taxable Distribution Method is coordinated with the tax treatment under local tax rules. Thus, deemed distributions under the Taxable Distribution Method are generally determined by reference to the law applicable to the Constituent Entity-owner. This feature of the Taxable Distribution Method is a departure from the ordinary GloBE Rules, where distributions from Constituent Entities are excluded from GloBE Income. The Taxable Distribution Method is intended to match both the timing and location of the income earned by an MNE Group through the Investment Entity with the tax on that income in the location where the Constituent Entity-owner is subject to tax on the distributions. 103. A Constituent Entity-owner that is itself an Investment Fund, i.e. an intermediate Investment Fund, does not include the distribution in its GloBE Income or Loss, to preserve the tax neutrality of Investment Entities. However, distributions to intermediate Investment Entities do not re-start the four-year clock on distributions to the Constituent Entity-owner for which the election is made. As explained below, distributions do not reduce the Undistributed Net GloBE Income until they reach a Constituent Entity that is not an Investment Entity. 104. Paragraph (b) requires the Constituent Entity-owner to include the Local Creditable Tax Gross-up in its GloBE Income and Adjusted Covered Taxes. The Local Creditable Tax Gross-up is defined in Article 7.6.5(d). It is generally the amount of Covered Taxes paid by the Investment Entity that is allowed as a credit in the computation of the Constituent Entity-owner’s tax liability in respect of a distribution from the Investment Entity. Rather than creating a separate regime for tracking and managing Covered Taxes associated with each Constituent Entity-owner’s share of the Investment Entity’s GloBE Income that is subject to the Taxable Distribution Method, the GloBE Rules rely on the tax credit rules in the Constituent Entity-owner’s location. Thus, the rule effectively provides credit for Covered Taxes paid by the Investment Entity under the GloBE Rules to the same extent a credit is allowed for local tax purposes. The rule also requires that the Local Creditable Tax Gross-up be treated as additional GloBE Income so that the tax credit does not have the same effect as allowing both a deduction and a credit. 105. Paragraph (c) provides that the Constituent Entity-owner’s proportionate share of the Investment Entity’s Undistributed Net GloBE Income is treated as GloBE Income of the Investment Entity for the Reporting Fiscal Year and the result of multiplying the Minimum Rate by such GloBE Income is treated as Top-up Tax of a Low-Tax Constituent Entity in the Fiscal Year for purposes of Chapter 2. Liability for this Top-up Tax is determined pursuant to Chapter 2. 106. Finally, to achieve the intended result of attributing income (and tax consequences) of the Investment Entity to the Constituent Entity-owners rather than the Investment Entity, Article 5.1.3 requires that the Investment Entity’s GloBE Income or Loss for the Fiscal Year, and any Adjusted Covered Taxes attributable to such income, are excluded from all ETR computations under Chapter 5 and Articles 7.4.1 to 7.4.5, except to the extent the Adjusted Covered Taxes are included in the Constituent Entity-owners GloBE Income or Loss and Adjusted Covered Taxes pursuant to paragraph (b) of the Article. Article 7.6.3 107. Article 7.6.3 defines the Undistributed Net GloBE Income and Article 7.6.4 provides additional rules to prevent double counting and to allow loss carry forwards. 108. Generally, the definition of Undistributed Net GloBE Income tests whether the GloBE Income arising in the Tested Year was distributed or offset by losses by the end of the Testing Period. Thus, as a practical matter, the MNE Group must maintain an Undistributed Net GloBE Income account for each Tested Year. The Undistributed Net GloBE Income is calculated for the entire Investment Entity, but Top- up Tax is computed based on the Constituent Entity-owner’s share of the Undistributed Net GloBE Income. 109. Under Article 7.6.5, the Tested Year is the third Fiscal year preceding the Reporting Fiscal Year. The Testing Period is the four-year period beginning with the Tested Year and ending with the Reporting Fiscal Year. For example, if the Investment Entity fully distributed its GloBE Income to its Constituent Entity-owners over the course of this four year period, no Top-up Tax could be imposed under the Taxable Distribution Method. The owner could of course be subject to Top-up Tax in one of those years based on its own circumstances. 110. The definition of Undistributed Net GloBE Income in Article 7.6.3 starts ...

Article 7.5.1 89. Article 7.5.1 provides a Five-Year election to treat an Investment Entity or Insurance Investment Entity as a Tax Transparent Entity. The election is available to Constituent Entity-owners of Investment Entities or Insurance Investment Entities that are subject to a mark-to-market or similar tax regime on investments in Investment Entities and Insurance Investment Entities. The treatment as a Tax Transparent Entity applies for all purposes of the GloBE Rules, including Article 3.5. 90. Under Article 10.1, Investment Entities are defined as Entities that meet the definition of an Investment Fund or Real Estate Investment Vehicle. Article 10.1 defines an Insurance Investment Entity as an Entity that would qualify as an Investment Fund or Real Estate Investment Vehicle but for the fact that it is wholly-owned by an insurance company and established in relation to liabilities under one or more insurance or annuity contracts. An Insurance Investment Entity may be wholly-owned by a single Entity, or by a number of Entities which are all part of the same MNE Group. The definition also requires that the owner, or owners, are subject to regulation as insurance companies. This requirement may also be met if the Insurance Investment Entity is owned by a Flow Through Entity which is subject to regulations in the same manner as an insurance company. If an election under Article 7.5.1 is made with respect to an Investment Entity or an Insurance Investment Entity, the rules in Article 7.4 do not apply. 91. The election, which is made by the Filing Constituent Entity, is only available where the Constituent Entity-owner is subject to tax in its location on changes in the value of its interest in the Investment Entity or Insurance Investment Entity (or its underlying investments) under a mark-to-market or similar regime at a rate that equals or exceeds the Minimum Rate. The election does not need to be made with respect to all Constituent Entity-owners of the Investment Entity. However, the election applies to all of a Constituent Entity-owner’s interests in the Investment Entity. 92. By treating the Investment Entity as tax transparent, the election allows the MNE Group to include the Constituent Entity-owner’s share of the Investment Entity’s results as income of the Constituent Entity- owner for GloBE purposes. This election matches the timing and location of income earned through an Investment Entity under the GloBE Rules and the local tax rules where the Constituent Entity-owner is subject to a mark-to-market or similar regime. 93. The election is available for both directly owned Investment Entities and Insurance Investment Entities as well as such Entities that are indirectly owned through other Investment Entities or Insurance Investment Entities. Thus, the tax effect of changes in value of a lower-tier Investment Entity or Insurance Investment Entity in a chain of such Entities that is reflected in the valuation of the interest in a directly held Investment Entity or Insurance Investment Entity can be matched with the GloBE Income or Loss of that Entity. The tax method and the financial accounting method of computing fair value may not be exactly the same, and thus, there may be timing differences even with the election. However, those differences will occur less frequently and in smaller amounts. 94. The Constituent Entity-owner’s share of the GloBE Income or Loss of the Investment Entity or the Insurance Investment Entity should not be counted twice by the Constituent Entity-owner. Only the Constituent Entity-owner’s share of the GloBE Income or Loss computed for the Investment Entity or Insurance Investment Entity should be taken into account pursuant to an election under Article 7.5. The income of the Investment Entity or Insurance Investment is likely to be determined using fair value accounting in the preparation of the Consolidated Financial Statements. 95. The Constituent Entity-owner should not account for its Ownership Interest in a Constituent Entity that is an Investment Entity or an Insurance Investment Entity using a fair value accounting method, even if, on a separate entity accounting basis, the Constituent Entity-owner does not control the Investment Entity or Insurance Investment Entity. The Constituent Entity-owner’s Financial Accounting Net Income or Loss should be determined pursuant to Chapter 3 using the accounting standard that was used to determine the Constituent Entity’s income in preparing the Consolidated Financial Statements. However, if for some reason the Constituent Entity-owner did account for its interest in the Investment Entity or Insurance Investment Entity using a fair value method, that income or loss should be excluded from the computation of its GloBE Income or Loss. 96. For example, assume that UPE owns 100% of the Ownership Interests of CE1 and CE2, and CE1 and CE2 own 90% and 10%, respectively, of the Ownership Interests in Fund, an Insurance Investment Entity. Fund earns 100 of net income in Year 1, pays no tax. and makes no distributions. An election under Article 7.5 is made on behalf of CE1 and CE2. Accordingly, CE1 and CE2 include their share of Fund’s income, 90 and 10, respectively, in the computation of their GloBE Income or Loss. On a standalone basis, CE1 controls Fund and thus would consolidate its accounts even if CE2 were an unrelated company. CE2, on the other hand, owns only 10% of Fund and on a standalone basis might be required to apply fair value accounting to its interest in Fund under the Acceptable Financial Accounting Standard used in the Consolidated Financial Statements. For purposes of the GloBE Rules, however, CE2 does not include any fair value gains or distributions from Constituent Entities. Otherwise, in this case, CE2 would recognise 10 of fair value gain in addition to the 10 of income included in its income under the Article 7.5 election. 97. In addition, the election allows the Constituent Entity-owner to apply the Substance-based Income Exclusion with respect to its share of the income of the Investment Entity. In many cases, the MNE Group’s Eligible Payroll Expenses and Eligible Tangible Assets related to managing the Investment Entity’s or Insurance Investment Entity’s activities will not ...

Overview of special rules applicable to Investment Entities in Articles 7.4 to 7.6 73. Investment Entities that are the UPE are excluded from the operation of the GloBE Rules because they are not Constituent Entities of any MNE Group. See Article 1.5.1(e). However, the income of a controlled Investment Entity is consolidated with the MNE Group and brought within the GloBE Rules. Articles 7.4 and 7.5 provide special rules applicable to controlled Investment Entities and Insurance Investment Entities and Article 7.6 provides a special rule applicable to controlled Investment Entities. 74. The rules in Article 7.4 provide a mechanism for calculating the ETR of a controlled Investment Entity or Insurance Investment Entity that is not subject to an election under Articles 7.5 or 7.6 (as applicable). The income of Investment Entities and Insurance Investment Entities is often subject to little or no tax at the entity level. Article 7.4 calculates the ETR and Top-up Tax of these Entities on a standalone basis to prevent an MNE Group from blending this low-taxed income with income of other Constituent Entities. Article 7.4 also seeks to ensure that minority investors are not subject to Top-up Tax on their interest in a low-taxed Investment Entity controlled by an MNE Group. It does so by calculating the ETR and Top-up Tax of a controlled Investment Entity only to the extent that the income is attributable to the MNE Group. 75. Article 7.5 provides an election to treat an Investment Entity or an Insurance Investment Entity as a Tax Transparent Entity. (Investment Entities and Insurance Investment Entities that meet the definition of a Tax Transparent Entity in Article 10.2.1 do not need to make the election.) Under the election, the income and Covered Taxes of the Investment Entity or Insurance Investment Entity flow through to the Constituent Entity-owner and thus the special rules in Article 7.4 are not needed to compute the Investment Entity’s ETR. As explained in more detail below, an Insurance Investment Entity is an Entity that would meet the definition of an Investment Entity except that it is wholly-owned by an insurance company. Insurance Investment Entities are eligible to make the Article 7.5 election. 76. Finally, Article 7.6 provides an election for the Constituent Entity-owner of a controlled Investment Entity. Under the election, the Constituent Entity-owner includes distributions received from the Entity in the computation of its GloBE Income or Loss. The Constituent Entity-owner’s share of the Investment Entity’s income is excluded from the MNE Group’s GloBE Income or Loss computations so long as it is distributed to the Constituent Entity-owner within four years. 77. As part of the GloBE Implementation Framework, further consideration will be given to the treatment of Insurance Investment Entities whose Constituent Entity-owners are not subject to a mark-to- market or similar tax regime on their investments in such Entities. Article 7.4.1 78. Article 7.4 only applies to Investment Entities and Insurance Investment Entities that are not Tax Transparent Entities. The rules contained in Article 3.5 continue to apply to the income of Investment Entities and Insurance Investment Entities that are Tax Transparent Entities. In addition, Article 7.4 does not apply to the portion of an Investment Entity’s or an Insurance Investment Entity’s income that is subject to an election under Article 7.5 or Article 7.6. 79. Where an Investment Entity or Insurance Investment Entity is a Tax Transparent Entity in part and a Reverse Hybrid Entity in part, Article 7.4.1. applies with respect to its income, expenditure, profit or loss to the extent that it is not fiscally transparent in the jurisdiction in which the owner is located. For example, if an Investment Entity is organised as a trust and taxable on its income that is not distributed to beneficiaries, Article 7.4.1 applies to the extent the Investment Entity’s or Insurance Investment Entity’s income is not distributed. Article 7.4.2 80. Article 7.4.2 describes the rules for computing the ETR of an Investment Entity or Insurance Investment Entity. The ETR is calculated separately from any other Constituent Entities in the same jurisdiction (in other words, the GloBE Income or Loss and Covered Taxes are not blended with those of other Constituent Entities in the jurisdiction). However, if the MNE Group owns interests in multiple Investment Entities or Insurance Investment Entities located in the same jurisdiction, a single ETR is computed for all such Entities in the jurisdiction. 81. The ETR is the Investment Entity’s or Insurance Investment Entity’s Adjusted Covered Taxes (defined in Article 7.4.3) divided by the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE Income determined under Chapter 3. Article 7.4.3 82. Article 7.4.3 provides the calculation of an Investment Entity’s or Insurance Investment Entity’s Adjusted Covered Taxes. It is the sum of Covered Taxes accrued by the Investment Entity pursuant to Article 4.1 and the Covered Taxes accrued by its Constituent Entity-owners allocable to the Investment Entity or Insurance Investment Entity pursuant to Article 4.3. The Covered Taxes paid by the Investment Entity are only those that correspond to the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income. The Covered Taxes accrued by Constituent Entity-owners taken into account under Article 7.4.3 are only those that arise with respect to their share of the Investment Entity’s or Insurance Investment Entity’s income. Article 7.4.4 83. Article 7.4.4 defines the MNE Group’s Allocable Share of the Investment Entity’s or Insurance Investment Entity’s GloBE Income. It must be calculated in the same way as would have been determined by the UPE in accordance with the rules of Article 2.2.2 taking into account only Ownership Interests in the Investment Entity or Insurance Investment Entity that are not subject to an election under Article 7.5 or Article 7.6. By excluding interests subject to an election under Articles 7.5 and 7.6, the ETR computation for the Investment Entity does not double count taxes that will be taken into account under those elections. Article 7.4.5 84. Article 7.4.5 provides the rules for computing the Top-up Tax for ...

52. Article 7.3 allows certain distribution tax regimes to be accommodated within the structure of the GloBE Rules, subject to certain safeguards and recapture rules. A distribution tax regime is a tax system that generally imposes income tax on a corporation when the corporation’s income is distributed or deemed to be distributed to its shareholders, rather than when it is earned. Distribution tax regimes also impose current tax in respect of certain non-business expenses. Current taxation based on these disallowed expenditures is equivalent to disallowing a deduction for such expenses under a more traditional income tax. Because these non-business expenditures reduce distributable earnings, they cannot be subject to tax on distribution as a practical matter. 53. The tax rates applicable under a distribution tax regime may equal or exceed the Minimum Rate such that the income is not subject to a low rate of tax when the earnings are eventually distributed. Absent a distribution or deemed distribution, however, much of the income is not subject to tax in the year it is earned and reported in the financial accounts. Moreover, the rules in Article 4.3 generally do not permit deferred tax liabilities in respect of taxes payable upon distribution to be included in the computation of the Total Deferred Tax Adjustment Amount. This means that the Constituent Entity’s GloBE Income likely would be subject to tax under the GloBE Rules in those years in which there is not an actual or deemed distribution because the Adjusted Covered Taxes for the Fiscal Year will be very small or nil. Moreover, in years where distributions are made, the amount of the distributions may bear no relationship to the income arising in those years, which may result in low or even extremely high ETRs. Article 7.3 mitigates these differences between the time the income accrues in the financial accounts and the time it is subject to distribution tax to the extent that distributions are made within a four-year period. Article 7.3.1 54. Article 7.3.1 allows the Filing Constituent Entity to make an annual election in respect of a Constituent Entity that is subject to a Eligible Distribution Tax System to add the Deemed Distribution Tax to the Adjusted Covered Taxes for the Fiscal Year. An election under Article 7.3.1 is subject to the other provisions of Article 7.3. Article 7.3.2 55. Article 7.3.2 determines the amount of Deemed Distribution Tax. It is the lesser of (a) the amount necessary to increase the Effective Tax Rate computed under Article 5.2.1 for the jurisdiction for the Fiscal Year to the Minimum Rate or (b) the amount of distribution tax that would have been paid if the Constituent Entities in the jurisdiction had distributed all of their income that is subject to the Eligible Distribution Tax Regime during such Fiscal Year. Thus, if the GloBE Income for the Fiscal Year were to exceed the amount of earnings that could be distributed and subject to tax upon distribution for that Fiscal Year, the Deemed Distribution Tax would be limited under paragraph (b) to the amount of tax that would arise if all taxable earnings for the Fiscal Year were distributed. 56. The purpose of the limitation in paragraph (b) is to ensure that under ordinary circumstances the Deemed Distribution Tax does not exceed the amount of tax that could possibly arise under the relevant distribution tax system for a Fiscal Year if all earnings were distributed in the year earned. The rule is not intended to supplant or interfere with the rules in Articles 7.3.3 and 7.3.4 for establishing and using a Recapture Account Loss Carry-forward. Thus, the computation under paragraph (b) is made without regard to any negative balance in the accumulated earnings of Constituent Entities in the jurisdiction as of the end of the preceding Fiscal Year. Article 7.3.3 57. In order to track the extent to which Deemed Distribution Tax is paid within the 4-year period, a Deemed Distribution Tax Recapture Account for each Fiscal Year in which the election was made must be maintained and available for examination by the tax authorities of jurisdictions imposing the GloBE Rules. The Deemed Distribution Tax Recapture Accounts are maintained on a jurisdictional basis. This facilitates jurisdictional blending of income. It also ensures that the adjustments to the recapture accounts accommodate a consolidation or group relief system in the jurisdiction and allows distributions from any Constituent Entity to eliminate the account. 58. A Deemed Distribution Tax Recapture Account is established for each Fiscal Year in an amount equal to the Deemed Distribution Tax. These annual accounts can be reduced in the three ways described in more detail below. The accounts are reduced in chronological order beginning with the account established for the earliest Fiscal Year and cannot be reduced below zero. 59. Deemed Distribution Tax Recapture Accounts are first reduced by distribution taxes actually paid by the Constituent Entities as a result of distributions or deemed distributions. Distribution taxes are charged against the Deemed Distribution Tax Recapture Accounts in chronological order. The accounts are maintained based on the amount of Deemed Distribution Tax rather than the amount of GloBE Income arising in the relevant Fiscal Year. Consequently, if the jurisdiction decreases the distribution tax rate, more income will need to be distributed to yield the amount of tax necessary to eliminate the potential recapture. On the other hand, if the jurisdiction were to increase the distribution tax rate, the Constituent Entities could eliminate the accounts by distributing less of their income. 60. Second, the accounts are reduced when the jurisdiction has an overall GloBE Loss, meaning the aggregate GloBE Loss of Constituent Entities exceeds the aggregate GloBE Income of Constituent Entities located in the jurisdiction. The reduction for GloBE Losses is applied to the oldest Deemed Distribution Tax Recapture Account to the extent thereof and then to newer accounts to the extent necessary to absorb the entire loss. Because the accounts are maintained in terms of Deemed Distribution Taxes rather than income, the amount of any GloBE ...

34. Article 7.2 contains a set of rules for UPEs that are subject to a Deductible Dividend Regime. These rules allow a deduction in the computation of the GloBE Income or Loss for Deductible Dividends. Deductible Dividend Regimes typically apply to investment companies as well as Cooperatives. Although a Deductible Dividend Regime may apply to both Entities that qualify as Investment Entities under the GloBE Rules and other similar purpose Entities that do not meet the Investment Entity definition, the rules in Article 7.2 are needed only for those Entities that do not meet the Investment Entity definition because an Investment Entity that is the UPE is an Excluded Entity. 35. A Deductible Dividend Regime is a tax regime designed to yield a single level of taxation on the owners of an Entity through the allowance of a deduction from the income of the Entity for distributions of profits to the owners. The owners are subject to tax on the dividends and the Entity is subject to tax on earnings that are not distributed. Patronage dividends of a Cooperative are treated as distributions to owners under the definition of Deductible Dividend Regime in Article 10.1, and thus tax regimes intended to yield a single level of taxation for Cooperatives and their patrons will typically qualify as Deductible Dividend Regimes. 36. Deductible Dividends are defined in Article 10.1 as distributions of profits that are deductible from taxable income under the laws of the jurisdiction in which the Constituent Entity is located and patronage dividends paid by a Cooperative. Because the definition of Deductible Dividend Regime includes Cooperatives that are subject to an exemption regime, application of Article 7.2 to Cooperatives is not dependent upon allowance of a deduction from taxable income at the Cooperative level; Article 7.2 equally applies in the case of a Cooperative that is tax exempt under the laws of the jurisdiction in which it is located. 37. The substantive rules applicable to UPEs that are subject to Deductible Dividend Regimes are similar to the rules for UPEs that are Tax Transparent Entities. An important difference, however, is the treatment of losses incurred by the Constituent Entity. Unlike the treatment of losses incurred by a Tax Transparent Entity under local tax rules, the losses of an Entity subject to a Deductible Dividend Regime do not flow through to the owners. Accordingly, the GloBE Rules applicable to Deductible Dividend Regimes do not contain special rules for a GloBE Loss determined for a Constituent Entity. Such losses are taken into account in the computation of the Net GloBE Income for the jurisdiction in which the Entity is located. Article 7.2.1 38. Similar to Article 7.1.1, Article 7.2.1 allows for a reduction of the UPE’s GloBE Income (but not below to zero) by the amount of Deductible Dividends if the UPE is subject to a Deductible Distribution Regime. The provision applies if the Deductible Dividends are distributed within 12 months of the end of the UPE’s Fiscal Year. The Constituent Entity must maintain records sufficient to demonstrate the amount of GloBE Income for a Fiscal Year that was distributed within 12 months of the end of the Fiscal Year. Furthermore, it only applies in the cases described in paragraphs (a) to (c). Paragraph (a) 39. Paragraph (a) requires that the Deductible Dividends are subject to tax in the hands of the recipient within 12 months of the end of the UPE’s Fiscal Year. It further requires that one of the conditions set out in subparagraphs (i) to (iii) is met. 40. Subparagraph (i) sets out the general test for determining whether the Deductible Dividends reduce the UPE’s GloBE Income for the Fiscal Year. Under the primary test, the UPE’s GloBE Income is reduced by Deductible Dividends to recipients that are subject to a nominal tax rate that equals or exceeds the Minimum Rate. 41. Subparagraph (ii) sets out an alternative, independent test. The conditions under paragraph (ii) are met if it can be reasonably expected that the aggregate amount of Covered Taxes (paid by the UPE) and taxes paid by the owner on the income attributable to its Ownership Interest equals or exceeds the amount that results from multiplying the full amount of such income by the Minimum Rate. Subparagraph (ii) does not require an ETR computation. The conditions under this paragraph are met if the UPE demonstrates that it is reasonable to expect that tax paid in respect of its income will equal or exceed the tax liability on that income at the minimum rate. 42. Subparagraph (iii) contains a special rule for patronage dividends distributed to natural persons that are members of supply Cooperatives. A supply Cooperative is a Cooperative that purchases goods or services and resells them to its members or patrons. Profits earned by the supply Cooperative are distributed to the members, typically in proportion to their purchases from the Cooperative. Most supply Cooperatives are organised for the acquisition of goods for a group of merchants. However, some supply Cooperatives are organised for the benefit of consumers that are natural persons. Unless they are engaged in business as a sole proprietor, natural persons generally are not able to deduct the cost of the goods acquired through a supply Cooperative. To ensure that the GloBE Rules accommodate supply Cooperatives with members that are consumers, patronage dividends paid to natural persons from a supply Cooperative are treated in the same manner as distributions that are subject to tax at or above the Minimum Rate. This special rule means that such dividends are treated as subject to tax when received irrespective of whether they are in fact taxable receipts of the recipient. Paragraph (b) 43. Paragraph (b) covers the case where the dividend recipient is a natural person that is tax resident in the UPE Jurisdiction and that holds Ownership Interests that in aggregate carry rights to 5% or less of the profits and assets of the UPE. The Commentary to Article 7.1.1(b) is applicable to Article 7.1.2 (b) as ...

2. A jurisdiction’s tax system may contain rules designed to achieve a single level of taxation on business income. While some jurisdictions may achieve this by adjusting the treatment of income in the hands of the owner (e.g. by exempting distributions received by shareholders), others may provide for a similar result by adjusting the treatment of income in the hands of the business entity (e.g. by treating certain entities or arrangements as transparent for tax purposes or permitting that entity or arrangement to deduct distributions to its investors from its taxable income). These regimes are premised on the idea that the tax on the entity’s income is effectively collected at the level of the owner, either by taxing that owner directly on its allocable share of the entity’s income (in the case of a Tax Transparent Entity) or by taxing the owners on a Deductible Dividend paid by the entity (in the case of a Deductible Dividend Regime, discussed in the Commentary to Article 7.2). 3. These approaches to single-level taxation could result in unintended outcomes under the GloBE Rules when they apply to the UPE. This is because the ETR of the UPE itself will be nil (or very low), potentially resulting in a significant Top-up Tax charge even though the burden of taxation has not been avoided but rather is borne by the Entity’s owners. 4. Such an outcome would indeed result from an application of the relevant rules in Chapters 3 and 4. While the income allocation rules for a Tax Transparent Entity under Article 3.5.1(a) and (b) ordinarily match the income with the Covered Taxes (i.e. both in the hands of the owners or PEs), this does not work where the Tax Transparent Entity is the UPE, because its owners are not Group Entities. Accordingly, Article. 3.5.1(c) allocates the income of a Tax Transparent Entity that is the UPE to the Entity itself. Furthermore, Article 4.3, which allocates Covered Taxes paid by one Constituent Entity in connection with income earned by another Constituent Entity does not apply in the case of taxes paid by persons that are not Group Entities. Allocating the taxes accrued by the owners that are outside the MNE Group would be both against the policy intention of the GloBE Rules (which is to ensure that a minimum tax is paid by MNE Groups), and administratively difficult (to obtain the necessary information from, and extract the relevant portion of taxes paid by, unrelated or uncontrolled owners of the UPE). 5. The rules in Article 7.1 resolve this issue for certain situations. The principle underlying the rules in Article 7.1 is that to the extent that the tax neutrality regime imposes tax on the UPE’s owners (e.g. partners, beneficiaries or shareholders) at or above the Minimum Rate on the UPE’s income contemporaneously or within a short time, the UPE’s exposure to Top-up Tax will likewise be reduced. This is achieved by a reduction to the GloBE income of the UPE corresponding to the share of its income that is subject to tax at or above the minimum rate in the hands of its owners (and thereby reducing, perhaps eliminating, any exposure to Top-up Tax). 6. For purposes of applying Article 7.1, the GloBE Implementation Framework will consider providing Agreed Administrative Guidance on the treatment of a Tax Transparent Entity that would be the UPE of the MNE Group if its Controlling Interests were not held by an Excluded Entity. Article 7.1.1 7. Article 7.1.1 permits the UPE to reduce its GloBE Income for a Fiscal Year in the three situations described in paragraphs (a) to (c). 8. The rules of Article 7.1.1 apply with respect to each Ownership Interest. The UPE will reduce its GloBE Income by the amount of GloBE Income attributable to each Ownership Interest that meets a criterion in paragraphs (a) to (c). The remainder of the income, if any, will be included in the computation of the UPE’s GloBE Income or Loss and included in the computation of the Net GloBE Income for the jurisdiction under Article 5.1.2. Paragraph (a) 9. The general rule is described in paragraph (a).1 The paragraph sets out two tests that must be met with respect to each Ownership Interest for the reduction to apply: a taxable period test and a minimum tax test. The first test is included at the beginning of paragraph (a) and requires that the holder is subject to current taxation on such income. Specifically, the holder must be subject to tax on its share of the UPE’s GloBE Income for a taxable period that ends within 12 months of the end of the MNE Group’s Fiscal Year. The holder is not required to pay its tax liability within 12 months of the end of the MNE Group’s Fiscal Year to meet this test. It is sufficient that the holder’s share of the UPE’s GloBE Income is included in its taxable income for a taxable year that ends within 12 months of the MNE Group’s Fiscal Year end. 10. A holder is subject to tax on its share of the UPE’s GloBE Income if that income is includible in the holder’s taxable income under the laws of the jurisdiction in which the holder is tax resident or includible in taxable income of a PE of the holder. 11. The second test evaluates the holder’s level of taxation and can be satisfied if the conditions in subparagraphs (i) or (ii) are met. The conditions in subparagraphs (i) to (ii) are alternatives; thus, the conditions in only one of the subparagraphs need to be satisfied. 12. Subparagraph (i) is met if the holder is subject to tax on the full amount of its share of the GloBE Income (that is, for example, without the benefit of an exemption) and subject to tax at a nominal rate that equals or exceeds the Minimum Rate (meaning no ETR calculation is required in respect of the holder). Temporary difference (i.e. a timing difference) between the time ...

1. Chapter 7 contains special rules that are applicable to certain tax neutrality and distribution tax regimes. These special rules adapt the GloBE Rules to the unique features of these regimes ...

7.6.1. At the election of the Filing Constituent Entity, a Constituent Entity-owner that is not an Investment Entity may apply the Taxable Distribution Method with respect to its Ownership Interest in a Constituent Entity that is an Investment Entity if the Constituent Entity-owner can be reasonably expected to be subject to tax on distributions from the Investment Entity at a tax rate that equals or exceeds the Minimum Rate. 7.6.2. Under the Taxable Distribution Method: (a)  distributions and deemed distributions of the Investment Entity’s GloBE Income are included in the GloBE Income of the Constituent Entity-owner (other than an Investment Entity) that received the distribution; (b) the Local Creditable Tax Gross-up is included in the GloBE Income and Adjusted Covered Taxes of the Constituent Entity-owner (other than an Investment Entity) that received the distribution; (c) the Constituent Entity-owner’s proportionate share of the Investment Entity’s Undistributed Net GloBE Income for the Tested Year is treated as GloBE Income of the Investment Entity for the Reporting Fiscal Year and the result of multiplying the Minimum Rate by such GloBE Income is treated as Top-up Tax of a Low-Tax Constituent Entity in the Fiscal Year for purposes of Chapter 2; and (d) the Investment Entity’s GloBE Income or Loss for the Fiscal Year and any Adjusted Covered Taxes attributable to such income are excluded from all Effective Tax Rate computations under Chapter 5 and Articles 7.4.2 to 7.4.5, except as provided in paragraph (b). 7.6.3. The Undistributed Net GloBE Income for a Fiscal Year is the amount of the Investment Entity’s GloBE Income, if any, for the Tested Year reduced (but not below zero) by: (a) any Covered Taxes of the Investment Entity; (b) distributions and deemed distributions to shareholders other than Constituent Entities that are Investment Entities in the Testing Period; (c) GloBE Losses arising in the Testing Period; and (d) Investment Loss Carry-forwards. 7.6.4. Undistributed Net GloBE Income for the Tested Year cannot be reduced by distributions or deemed distributions to the extent that such distributions were treated as a reduction to Undistributed Net GloBE Income of a previous Tested Year. For purposes of computing Undistributed Net GloBE Income, a GloBE Loss is reduced to the extent it reduced Undistributed Net GloBE Income at the end of a previous Fiscal Year. If a GloBE Loss for a Fiscal Year is not reduced to zero before the end of the end of the last Tested Period that includes such Fiscal Year, the remainder becomes an Investment Loss Carry-forward and is reduced in the same manner as a GloBE Loss in subsequent Fiscal Years. 7.6.5. For purposes of Article 7.6, (a) the Tested Year is the third year preceding the Reporting Fiscal Year; (b) the Testing Period is the period beginning with the first day of the Tested Year and ending with the last day of the Reporting Fiscal Year that the Ownership Interest was held by a Group Entity; (c) a deemed distribution arises when a direct or indirect Ownership Interest in the Investment Entity is transferred to a non-Group Entity and is equal to the proportionate share of the Undistributed Net GloBE Income attributable to such Ownership Interest on the date of such transfer (determined without regard to the deemed distribution); and (d) the Local Creditable Tax Gross-up is the amount of Covered Taxes incurred by the Investment Entity that is allowed as a credit against the Constituent Entity-owner’s tax liability arising in connection with a distribution from the Investment Entity. 7.6.6. The election under this Article is a Five-Year Election.  If the election is revoked, Constituent Entity-owner’s proportionate share of the Investment Entity’s Undistributed Net GloBE Income for the Tested Year at the end of the Fiscal Year preceding the revocation year is treated as GloBE Income of the Investment Entity for the revocation year and the result of multiplying the Minimum Rate by such GloBE Income is treated as Top-up Tax of a Low-Tax Constituent Entity in the revocation year for purposes of Chapter 2 ...

7.5.1. A Filing Constituent Entity may elect to treat a Constituent Entity that is an Investment Entity or an Insurance Investment Entity as a Tax Transparent Entity if the Constituent Entity-owner is subject to tax in its location under a mark-to-market or similar regime based on the annual changes in the fair value of its Ownership Interest in the Entity and the tax rate applicable to the Constituent Entity-owner with respect to such income equals or exceeds the Minimum Rate. For this purpose, a Constituent Entity that indirectly owns an Ownership Interest in an Investment Entity or Insurance Investment Entity through a direct Ownership Interest in another Investment Entity or Insurance Investment Entity is considered to be subject to tax under a mark-to-market or similar regime with respect to the indirect Ownership Interest in the first-mentioned Entity if it is subject to a mark-to­ market or similar regime with respect to the direct Ownership Interest in the second-mentioned Entity. 7.5.2. The election under this Article is a Five-Year Election. If the election is revoked, gain or loss from the disposition of an asset or liability held by the Investment Entity shall be determined based on the fair value of the assets or liabilities on the first day of the revocation year ...

7.4.1. The rules of Article 7.4 apply to Constituent Entities that meet the definition of an Investment Entity, except Investment Entities that are Tax Transparent Entities or subject to an election under Article 7.5 or Article 7.6. 7.4.2. The Effective Tax Rate for an Investment Entity that is a Constituent Entity shall be calculated separately from the Effective Tax Rate of the jurisdiction in which it is located. The Effective Tax Rate for each such Investment Entity is equal to the Investment Entity’s Adjusted Covered Taxes divided by the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income determined under Chapter 3. If there is more than one Investment Entity located in the jurisdiction, the Adjusted Covered Taxes and the MNE Group’s Allocable Share of each Investment Entity’s GloBE Income or Loss determined for each such Investment Entity are combined to compute the Effective Tax Rate of all such Investment Entities. 7.4.3. An Investment Entity’s Adjusted Covered Taxes is the sum of the Adjusted Covered Taxes determined for the Investment Entity under Article 4.1 attributable to the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income and the Covered Taxes allocated to the Investment Entity under Article 4.3. The Investment Entity’s Adjusted Covered Taxes does not include any Covered Taxes accrued by the Investment Entity attributable to income that is not part of the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income. 7.4.4. The MNE Group’s Allocable Share of the Investment Entity’s GloBE Income is equal to the Allocable Share of the Investment Entity’s GloBE Income or Loss that would be determined for the Ultimate Parent Entity in accordance with the rules of Article 2.2.2 taking into account only interests that are not subject to an election under Article 7.5 or Article 7.6. 7.4.5. The Top-up Tax of a Constituent Entity that is an Investment Entity shall be an amount equal to the Top-up Tax Percentage for the Investment Entity multiplied by the excess of the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income over the Substance-based Income Exclusion for the Investment Entity. The Top-up Tax Percentage for an Investment Entity shall be the percentage point excess, if any, of the Minimum Rate over the Effective Tax Rate of the Investment Entity. If there is more than one Investment Entity located in the jurisdiction, the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income and the Substance-based Income Exclusion determined for each such Investment Entity are combined to compute the Effective Tax Rate of all such Investment Entities. 7.4.6. The Substance-based Income Exclusion for an Investment Entity shall be determined in accordance with the principles in Article 5.3 without regard to the exception in Article 5.3.2, and by taking into account only Eligible Tangible Assets and Eligible Payroll Costs of Eligible Employees of the Investment Entities reduced in proportion to the MNE Group’s Allocable Share of the Investment Entity’s GloBE Income to the Investment Entity’s total GloBE Income ...

7.3.1. A Filing Constituent Entity may make an annual election with respect to a Constituent Entity that is subject to an Eligible Distribution Tax System to add the amount of Deemed Distribution Tax determined under Article 7.3.2 to Adjusted Covered Taxes for the Fiscal Year. An election under this Article shall apply to all Constituent Entities located in the jurisdiction. 7.3.2. The amount of Deemed Distribution Tax is the lesser of: (a) the amount of Adjusted Covered Taxes necessary to increase the Effective Tax Rate computed under Article 5.2.1 for the jurisdiction for the Fiscal Year to the Minimum Rate; or (b) the amount of tax that would have been due if the Constituent Entities located in the jurisdiction had distributed all of their income that is subject to the Eligible Distribution Tax Regime during such year. 7.3.3. An annual Deemed Distribution Tax Recapture Account is established for each Fiscal Year in which the election in Article 7.3.1 applies. A Deemed Distribution Tax Recapture Account is increased by the amount of the Deemed Distribution Tax determined under Article 7.3.2 for the jurisdiction for the Fiscal Year for which it was established. At the end of each succeeding Fiscal Year, the outstanding balances of Deemed Distribution Tax Recapture Accounts established for prior Fiscal Years are reduced in chronological order and to the extent thereof, but not below zero: (a) first by Taxes paid by the Constituent Entities during the Fiscal Year in relation to actual or deemed distributions; (b) then by the amount of any Net GloBE Loss of the jurisdiction multiplied by the Minimum Rate; and (c) then by any amount of Recapture Account Loss Carry-forward applied to the current Fiscal Year pursuant to Article 7.3.4. 7.3.4. A Recapture Account Loss Carry-forward shall be established for the jurisdiction when the amount described in Article 7.3.3(b) exceeds the outstanding balance of the Deemed Distribution Tax Recapture Accounts. The Recapture Account Loss Carry-forward shall be in an amount equal to such excess and shall be taken into account in subsequent Fiscal Years as a reduction to Deemed Distribution Tax Recapture Accounts in such Fiscal Years. When such amount is taken into account in a subsequent Fiscal Year, the Recapture Account Loss Carry-forward must be reduced by that amount. 7.3.5. If there is an outstanding balance of a Deemed Distribution Tax Recapture Account (maintained in accordance with Article 7.3.3) on the last day of the fourth Fiscal Year after the Fiscal Year for which such account was established, the Effective Tax Rate and Top-up Tax for the Fiscal Year for which the account was established must be recalculated under Article 5.4.1 by treating the balance of the Deemed Distribution Tax Recapture Account as a reduction to the Adjusted Covered Taxes previously determined for such year. 7.3.6. Taxes paid during the Fiscal Year in relation to actual or deemed distributions are not included in Adjusted Covered Taxes to the extent they reduce a Deemed Distribution Tax Recapture Account under Article 7.3.3. 7.3.7. In the Fiscal Year that a Departing Constituent Entity leaves the MNE Group or transfers substantially all of its assets, (a) the Effective Tax Rate and Top-up Tax for each preceding year for which a Deemed Distribution Tax Recapture Account is outstanding is re-calculated in accordance with the principles of Article 5.4.1. by treating the balance of the Deemed Distribution Tax Recapture Account as a reduction to the Adjusted Covered Taxes previously determined for such year; and (b) any amount of incremental Top-up Tax resulting from such recalculation shall be multiplied by the Disposition Recapture Ratio to determine the Additional Current Top-up Tax for purposes of Article 5.2.3. 7.3.8. The Disposition Recapture Ratio is determined for each Departing Constituent Entity using the following formula: Where: (a) GloBE Income of the CE is the sum of GloBE Income of the Departing Constituent Entity determined in accordance with Chapter 3 for each Fiscal Year corresponding to the Deemed Distribution Tax Recapture Accounts for the jurisdiction; and (b) Net Income of the jurisdiction is the sum of the Net GloBE Income of the jurisdiction determined In accordance with Article 5.1.2 for each Fiscal Year corresponding to the Deemed Distribution Tax Recapture Accounts for the jurisdiction ...

7.2.1. For purposes of computing its GloBE Income or Loss for a Fiscal year, an Ultimate Parent Entity that is subject to a Deductible Dividend Regime shall reduce (but not below zero) its GloBE Income for such Fiscal Year by the amount that is distributed as a Deductible Dividend within 12 months of the end of the Fiscal Year if: (a) the dividend is subject to tax in the hands of the dividend recipient for a taxable period that ends within 12 months of the end of the MNE Group’s Fiscal Year, and: (i) the dividend recipient is subject to tax on such dividend at a nominal rate that equals or exceeds the Minimum Rate; (ii) it can be reasonably expected that the aggregate amount of Adjusted Covered Taxes of the Ultimate Parent Entity and Taxes paid by the dividend recipient on the dividend income equals or exceeds the amount that results from multiplying the full amount of such income by the Minimum Rate; or (iii) the dividend recipient is a natural person and the dividend is a patronage dividend from a supply Cooperative; or (b) the dividend recipient is a natural person that: (i) is a tax resident in the UPE Jurisdiction; and (ii) holds Ownership Interests that, in the aggregate, are a right to 5% or less of the profits and assets of the Ultimate Parent Entity. (c) the dividend recipient is resident in the UPE Jurisdiction and is: (i) a Governmental Entity, (ii) an International Organisation, (iii) a Non-profit Organisation or (iv) a Pension Fund that is not a Pension Services Entity. 7.2.2. An Ultimate Parent Entity that reduces its GloBE Income pursuant to Article 7.2.1 shall reduce its Covered Taxes (other than the Taxes for which the dividend deduction was allowed) proportionally and shall reduce its GloBE Income by the same amount. 7.2.3. If the Ultimate Parent Entity holds an Ownership Interest in another Constituent Entity subject to the Deductible Dividend Regime (directly or through a chain of such Constituent Entities), Articles 7.2.1 and 7.2.2 shall apply to each other Constituent Entity in the UPE Jurisdiction that is subject to the Deductible Dividend Regime to the extent that its GloBE Income is further distributed by the Ultimate Parent Entity to recipients that meet the requirements of Article 7.2.1. 7.2.4. Patronage dividends from a supply Cooperative are subject to tax to the extent they reduce an expense or cost that is deductible in the computation of the recipient’s taxable income ...

7.1.1. The GloBE Income for a Fiscal Year of a Flow-through Entity that is the Ultimate Parent Entity of an MNE Group shall be reduced by the amount of GloBE Income attributable to each Ownership Interest if: (a) the holder of the Ownership Interest is subject to tax on such income for a taxable period that ends within 12 months of the end of the MNE Group’s Fiscal Year and: (i) the holder of the Ownership Interest is subject to tax on the full amount of such income at a nominal rate that equals or exceeds the Minimum Rate; or (ii) it can be reasonably expected that the aggregate amount of Adjusted Covered Taxes of the Ultimate Parent Entity and Taxes of the holder of the Ownership Interest on such income equals or exceeds the amount that results from multiplying the full amount of such income by the Minimum Rate; or (b) the holder is a natural person that: (i) is a tax resident in the UPE Jurisdiction; and (ii) holds Ownership Interests that, in the aggregate, are a right to 5% or less of the profits and assets of the Ultimate Parent Entity; or (c) the holder is a Governmental Entity, an International Organisation, a Non-profit Organisation, or a Pension Fund that (i) is resident in the UPE Jurisdiction; and (ii) holds Ownership Interests that, in the aggregate, are a right to 5% or less of the profits and assets of the Ultimate Parent Entity. 7.1.2. In computing its GloBE Loss for a Fiscal Year, a Flow-through Entity that is the Ultimate Parent Entity of an MNE Group shall reduce its GloBE Loss for such Fiscal Year by the amount of GloBE Loss attributable to each Ownership Interest, except to the extent that the holders of Ownership Interests are not allowed to use the loss in computing their separate taxable income. 7.1.3. A Flow-through Entity that reduces its GloBE Income pursuant to Article 7.1.1 shall reduce its Covered Taxes proportionally. 7.1.4. Articles 7.1.1 through 7.1.3 shall apply to a Permanent Establishment: (a) through which a Flow-Through Entity that is the Ultimate Parent Entity of an MNE Group wholly or partly carries out its business; or (b) through which the business of a Tax Transparent Entity is wholly or partly carried out if the Ultimate Parent Entity’s Ownership Interest in that Tax Transparent Entity is held directly or through a Tax Transparent Structure ...

Operation of the rules in this chapter Chapter 7 deals with the application of the GloBE Rules to certain tax neutrality and other distribution regimes. Article 7.1 and Article 7.2 provide special rules in relation to Ultimate Parent Entities that are subject to a tax neutrality regime (such as a tax transparency regime or a Deductible Dividend Regime). Article 7.3 provides special rules in relation to certain tax regimes that subject an Entity to tax on its earnings when those earnings are distributed or deemed distributed. Article 7.4 to Article 7.6 provide special rules in relation to controlled Investment Entities that seek to preserve the tax neutrality of these Entities without giving rise to any leakage under the GloBE Rules ...